On 12 December 2013, the European Insurance and Occupational Pensions Authority (EIOPA) published its second Half-Year Financial Stability Report for 2013 (available here). The risk environment described in the second Half-Year report is broadly the same as the environment described in the first Half-Year report, published in July.
In particular, the most prominent risk to the insurance and reinsurance sector is still the prolonged low-interest rate environment. This risk affects both sides of the balance sheet: policy guarantees mean that relevant insurance liabilities are likely to be higher, and ordinary investment returns are likely to be lower, than they would have been if historic interest-rate norms had persisted. And these outcomes seem to be driving an increase in “search for yield”, “liquidity swap” and other activities, which bring risks of their own.
At the same time, a persistently weak macro-economic climate is still making it hard to generate meaningful written premium growth; and exposure to sovereign and corporate debt is still generating significant contagion risk.
EIOPA is also concerned about, and closely monitoring, the strong flow of new capital into Insurance Linked Securities (ILS).
EIOPA plans to run comprehensive stress test in 2014 to help it better understand the nature, and interconnectedness of these risks, as well as the interconnectedness of the insurance sector with the rest of the financial system. This is likely to generate at least a discussion about the interconnectedness of insurance and reinsurance with “Main Street”, as well.
This must be the right thing to do – but it will strike fear into the hearts of many insurance and reinsurance professionals, given the number of myths and misunderstandings that still permeate insurance and reinsurance regulation; and the sheer volume of Solvency II preparatory work that still needs to be done during the coming year. We will continue to blog these developments as they happen. In the meantime, our blogs about EIOPA’s “Opinion on the Supervisory Response to a Prolonged Low Interest Rate Environment“, and our more detailed blog about EIOPA’s ILS concerns, are available here and here.